UK retailer The Co-operative Group finally got its man today (16 July) with the announcement of its GBP1.6bn (US$3.2bn) takeover of Somerfield. The acquisition will make the Co-op the country’s fifth-largest retailer but, as Dean Best reports, questions are being asked over how easy it will be to digest Somerfield – and compete with the “big four”.

The Co-operative Group’s patient pursuit of fellow UK retailer Somerfield paid off today (16 July) when the company announced it had finally secured a takeover of the business.

The Co-op has been eyeing Somerfield for months and has taken great pleasure in speaking of its delight in finally striking an agreement. The acquisition of Somerfield, after all, presented UK retailers with one of the last chances to gain a big chunk of the market in one swoop.

Somerfield was put up for sale in January by its owners, a consortium that included property tycoon Robert Tchenguiz, Apax Partners and Barclays Capital. Despite rumours linking the likes of Asda and Waitrose to the business, in April, the Co-op emerged as the only suitor to have made a formal bid for the retailer. There then followed months of talks, which culminated in this morning’s announcement that the Co-op would buy Somerfield in a deal worth GBP1.565bn (US$3.1bn).

For Peter Marks, chief executive of the Co-op, the acquisition of Somerfield is not simply the climax of a few months’ hard work and intense negotiations. Marks, as boss of what was then the retailer United Co-operatives, first eyed Somerfield when it changed hands in 2005 and was eventually bought by the Tchenguiz consortium.

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Now, as head of the enlarged Co-operative Group, which merged with United Co-operatives last year, Marks has finally got his man.

“This is a transformational deal, cementing our position as the UK’s premier community retailer and helping us significantly as we lead a renaissance of the Co-operative brand,” Marks said.

The Co-op becomes the UK’s fifth-largest grocer, commanding around 8% of the country’s food retail market. In the 1960s, the Co-op was the UK’s largest food retailer and the deal will see the return of the company into many neighbourhoods in the country.

Marks believes the move from the “big four” UK retailers – Tesco, Asda, Sainsbury’s and Morrisons – to a “big five” including the Co-op will further boost competition for UK consumers. The competitive landscape in the UK grocery sector has been under the microscope in recent years, with industry watchers questioning whether it was healthy to have four powerful nationwide chains.

For some, the coming together of the Co-op and Somerfield will have quite an impact on the UK grocery scene. “The merger is the biggest structural change in the UK for five years and is quite literally a big deal for food and grocery in the UK,” said Louise Spillard, director of research at IGD.

Spillard said she believes an enlarged Co-op food retail business will be able to make further progress in tapping into some of the fastest-growing segments in the market. “The new business is well-placed to capitalise on trends we have identified in the UK market, particularly shoppers’ increasing appetite for top-up convenience shopping, local shopping, and for ethical foods,” she said.

Growth in the convenience channel is outstripping other parts of the UK grocery sector but questions remain over how effectively the Co-op can compete with its larger rivals. The company faces having to sell off a number of the stores from its new, enlarged 3,000-strong estate in order to get the green light from UK competition authorities – and that could provide welcome acquisition opportunities for its rivals.

Morrisons, the UK’s fourth-largest grocer, has publicly declared its interest in buying “selected” Somerfield outlets, while the likes of Aldi and Waitrose have been named by onlookers as other potential interested parties for any stores that are offloaded.

“Morrisons really doesn’t trade off anything less than 25,000 sq ft and there are a very small number of stores that size in the Somerfield portfolio,” James Flower, senior consultant at retail analysts Verdict Research said. “In terms of who will benefit [from the sale of Somerfield stores], I think it will be a spread depending on the type and number of stores sold.”

For Flower, the disposal of stores will be just the first challenge the Co-op will encounter as it integrates Somerfield into the business. “Somerfield is a big business and the Co-op will encounter problems. One of the big issues is whether the Co-op will have too much on its plate integrating Somerfield into the Co-op business, while operating the current chain in what is an extremely competitive market, particularly in terms of product development, store format, offers and prices.”

Flower also points to the fact that many of the Somerfield outlets are larger than most of those in the Co-op estate, and believes there are still questions over the Co-op’s record with larger stores of around 10,000 sq ft. “The Co-op has been making progress this year but it has struggled with larger stores. It has done better recently but it is still learning,” he added.

Much, then, for Marks and his management team to ponder in the weeks and months ahead. The company has a strong track-record in integrating businesses: witness last year’s merger of the Co-operative Group and United Co-operatives. However, there are indications that the acquisition and integration of Somerfield could be more tricky to pull off.

Nevertheless, the deal should, according to Flower, create a much stronger retailer in the medium term. He points to the initial problems Morrisons had digesting Safeway and the much stronger position the company is now in four years after that deal.

“I feel sure that, in two years time, the Co-op will be able to look back from a stronger position. There are challenges ahead but it is no reason to think that the Co-op cannot overcome them. But, it would be naïve to think: ‘It’s done now, we’ve got 8% market share, let’s move on’. It is a supreme challenge integrating two, large grocery businesses.”